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1991 - 1992 ™»* ^Wernmen 

OF THE MASSACHUSETTS COMMUNITY 
ECONOMIC DEVELOPMENT ASSISTAN^ < 

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Community Economic 



Development Assistance Corporation 

19 Temple Place 

Suite 200 

Boston, Massachusetts 

02111 





(617)727-0506 



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1991 - 1992 annual REP(ffifc RNMENT DOCUMENTS 

OF THE MASSACHUSETTS COMMUNITY 
ECONOMIC DEVELOPMENT ASSISTAN^ 2 5 Wb 

corporation University of Massachusetts 

Depository Copy 



19 Temple Place 
Suite 200 
Boston, MA 
02111 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/cedacannualrepo199192comm 



Statement from the Chairman and the Executive Director 



During the 1991-1992 fiscal year, the Community Economic Development 
Assistance Corporation (CEDAC) continued to play a key role in providing both 
technical assistance services and financial resources to non-profit development 
organizations throughout the Commonwealth. Despite an environment in which it was 
far more difficult to both conceive and close affordable housing projects, CEDAC 
provided development assistance to 51 organizations to advance planning on 65 
projects containing 4,620 housing units during fiscal years 1991-1992. 

Thirteen projects closed on construction loans adding 93 1 affordable housing 
units to the state's inventory. The summary of program highlights listed below is 
illustrative of the productivity of CEDAC 's efforts. 

CEDAC also continued its programmatic focus on provision of staff 
consultation and pre-development loans to the "expiring use restriction" properties, 
federally financed private rental housing developments to which HUD will provide 
financing incentives to facilitate the conversion of these properties to resident or non- 
profit ownership. 

CEDAC provide key underwriting services to EOCD for the Housing 
Innovations Fund (HIF), which this year closed on 34 more projects, providing 904 
housing units of which over 85 % were affordable to lower-income families and 
individuals. 

And in the area of child care, CEDAC continued its collaboration with the 
United Way of Massachusetts Bay, local foundations, and the Ford Foundation to 
provide loans to non-profit day care centers to expand or upgrade their capital 
facilities. In FY 91-92, CEDAC made 16 loans totalling $582,500, for centers 
serving throughout the Massachusetts Bay region. 



Linda L. Conroy ^ Carl A. Sussman 

Chairman Executive Director 



Technical Assistance 

CEDAC's hallmark continues to be its willingness to provide technical 
assistance and predevelopment loans at the earliest phases of project planning. Scores 
of cash-poor nonprofit organizations, even those without prior development 
experience, have been assisted in developing highly successful housing developments 
with CEDAC's assistance. 



BOWDOIN LODGING HOUSE Amid the declining supply of SRO housing. 
the Boston Citywide Land Trust made a dramatic move to preserve this type 
of housing by acquiring 122 units on Boston's Beacon Hill. With the Trust's 
rehabilitation program underway, the residents, many of whom are persons 
with AIDS or Department of Mental Health clients, with continue to have a 
stable living situation close to the services they depend upon. 

BROWN-KAPLAN TOWNHOUSES Lena Park Community Development 
Corporation has chiselled one of the most attractive new neighborhoods in the 
state out of an overgrown series of vacant lots in Roxbury. This limited 
equity cooperative contains 60 units. It is a source of considerable 
community pride both because of its outstanding design and because of Lena 
Park's reliance on an outstanding Afro- American development team. 

THE PINES AT "O" STREET In Turner's Falls, the Franklin County CDC 
has successfully completed another homeownership project with ten units. 
Providing the opportunity for affordable first-time home-buyers has been a 
major focus for the CDC's residential development program; a mission they 
have carried-off with strong design and site planning. 

COLLEGE HIGHWAY APARTMENTS An Easthampton based nonprofit, 
relied on federal funds to build 40 units of housing for the elderly in 
collaboration with the Housing Allowance Project. Despite government 
cost-containment guidelines, College Highway Apartments is a 
newly-constructed facility with spacious rooms, large windows, and space for 
community activities. 

FOREST HILLS TENANT COOPERATIVE The Jamaica Plain 
Neighborhood Development Corporation has made a mark for itself helping 
tenants threatened with gentrification on the one hand and the dangers of 
drug trafficking on the other to make a stand. This 10 unit scattered site 
limited equity housing cooperative has resulted in improved housing 
conditions, homeownership and a more stable neighborhood. 



CEDAC's 1991 Annual Report 
Page 3 



SUPPORTIVE SRO HOUSING FOR WOMEN Cambridge YWCA took 
advantage of its location and the strong real estate market in the late '80s to 
sell development rights on some of its property. It used the proceeds of that 
transaction along with other development resources to renovate 107 single 
room occupancy units it operates in Central Square. 



Expiring Use Restriction (EUR) Preservation 

During the next decade, the owners of over 360,000 units of privately owned 
rental housing in the U.S., financed with federally-assisted mortgages, will be eligible 
to prepay those mortgages and to convert that housing from low- and moderate- 
income use. The potential impact is particularly acute in Massachusetts, which has 
32,156 of the affected units. 

The term "expiring use restrictions" or "EUR" is used to describe the 
problem because the prepayment of these HUD mortgages extinguishes mortgage 
covenants which restrict the owner to lease units only to low- and moderate- income 
households. Without these use restrictions owners could change the use from rental 
to condominium, and from affordable to market rate housing. 

Because of the sheer number of units at risk, CEDAC identified the EUR 
problem several years ago as the most crucial housing issue of the coming decade. In 
concert with other state agencies, such as EOCD, MHP, and MHFA, tenant 
organizations, and interested non-profit developers, CEDAC began to explore tenant 
and non-profit acquisitions of these properties as part of a state strategy for preserving 
this affordable housing stock. 

CEDAC played a key role in structuring the successful acquisition at 
Clarendon Hill Towers in Somerville and is also working with tenant and non-profit 
organizations at Castle Square in Boston's South End, Allen Park in Springfield, ETC 
Associates in Boston, and Commonwealth and Glenville Apartments in the Brighton 
neighborhood of Boston. 

The passage last October of Title VI of the National Affordable Housing Act 
of 1990, also known as Low-Income Housing Preservation and Resident 
Homeownership Act (LIHPRHA), has lent new impetus to the sale of many of these 
developments to tenant and local nonprofit organizations. Title VI not only prevents 



CEDAC's 1991 Annual Report 
Page 4 



most (but not all) owners from prepaying their mortgages, it extends the low- and 
moderate- income rental use for the remaining useful life of the buildings. In return, 
the government is offering owners two ways to realize the same financial return as 
they would have realized had they been allowed to prepay their mortgages and change 
the use. 

This solution to the EUR problem will cost the Federal government $27.5 
billion over the next decade, preserve most of the units, allow for needed 
rehabilitation, and expand ownership opportunities for tenant and non-profit 
organizations. Owners may now retain ownership and, in return for extended 
affordability, will receive substantial federal financial incentives. Alternatively, 
owners can sell, and an advantage is given to "priority purchasers" - non-profit 
development organizations, resident associations, and public agencies - who will in 
turn, be obligated to preserve the affordability for the project's remaining useful life. 
Once again, such transfers can be achieved with federal financial assistance. 

Because Title VI confers this preferential purchaser status on CEDAC's 
constituency of non-profit developers and resident organizations, CEDAC sees 
substantial opportunities for non-profit ownership and management. 

The National Affordable Housing Act of 1990 

The Low-Income Housing Preservation and Resident Homeownership Act 
(Title VI of the National Affordable Housing Act of 1990) eliminates the right of 
owners of most low-income housing financed with U.S. Department of Housing and 
Urban Development (HUD) mortgages to prepay those mortgages without HUD 
approval. 

In return, the act gives the owner three options: 

■ terminate the existing affordability restrictions with HUD approval in 
certain circumstances; 

■ extend the restrictions in exchange for financial incentives from HUD; 

■ sell the property to a purchaser who receives financial incentives from 
HUD to preserve the housing for low-income use. 



CEDAC's 1991 Annual Report 
Page 5 



The first step an owner must take is to file a Notice of Intent with HUD. 
This notice cannot be filed earlier than two years before the date on which the owner 
would be eligible to prepay his mortgage - usually the 20th year of the year of the 40 
year mortgage. The Notice of Intent does not require the owner to make an 
irrevocable election as to which of these three options he intends to ultimately pursue, 
but initiates the process for making that decision. 

This notice signals HUD to commission an appraisal of the project's fair 
market value. If the owner eventually decides to retain ownership, the property will 
be appraised for its value as market rate rental housing. If the owner wants to sell, 
the appraisal will be based on the highest and best use of the property. Since the 
owner's decision is not final at this stage, HUD will need to determine both values; 
the values resulting from these appraisals are referred to as "Extension Preservation 
Values" for owners planning to retain ownership and as "Transfer Preservation 
Values" for sales. 

HUD next determines the equivalent "Preservation Equity," basically the 
values derived from the appraisal minus existing debt and mortgages secured by the 
property. Finally, these values are translated into "Preservation Rents" - a 
hypothetical construct which HUD then compares with an upper allowable rent level 
essentially equal to the income stream generated by project rents set at 120% of 
Section 8 Fair Market Rents for the area. If the preservation rents are within that 
limit, than the owner may proceed to either incentives to retain ownership, or to 
voluntarily sell the property to a priority purchaser. 

The most important point of this exercise is to determine whether the 
preservation rents exceed these allowable upper federal rent limits. If they do, the 
owner who may have sought to retain the property will receive a lower rate of return 
thus making a sale more desirable. An owner is not entitled to receive the 
preservation rents. Actual rents will be derived after negotiations between the owner 
or buyer and HUD. 

If an owner decides to pursue a sale, he must file a second Notice of Intent 
with HUD, declaring that this is his course of action. This notice then triggers a 12 
month marketing period within which only priority purchasers may attempt to 
negotiate a sales agreement with the owner for a sales price up to the preservation 
value. Under any scenario, if a sale agreement with a priority purchaser cannot be 
consummated within 12 months, the owner has another three months to reach 



CEDAC's 1991 Annual Report 
Page 6 



agreement with a "qualified purchaser," which includes for-profit entities who agree 
to preserve the housing for low-income use for its remaining useful life. 

However, the owner is entitled to prepay if this extended marketing period 
fails to produce a buyer or if the buyer fails to consummate the purchase. Should an 
agreement be reached, HUD is required to provide financial incentives to the 
purchaser sufficient to enable the purchaser to pay that price, subject only to 
appropriation of sufficient funding to HUD. 

Incentives may include Section 8 rental assistance for all tenants with 
incomes below 80% of median income; Section 241 mortgage insurance for up to 
95% of the preservation equity and 90% of the rehabilitation cost; Flexible Subsidy 
loans, and, for priority purchasers, grants equal to the present value of ten years of 
Section 8 Fair Market Rents. In general, such a sale ought to guarantee low-income 
preservation for the remaining useful life of the project and reimburse priority 
purchasers for their transaction costs. 

Thus the new legislation creates a powerful tool for preserving the EUR 
housing stock with a well-funded feral entitlement program. However, the risk of 
prepayment remains. Without technical assistance or the funds to satisfy the 
statutorily required equity contribution under the section 241 insurance program, most 
priority purchasers will be prevented from bidding on EUR properties. It is hoped 
that provisions contained in a state housing bond bill currently pending on Beacon Hill 
will provide these much needed resources. 

Castle Square Tenants Near Victory 

Residents of the Castle Square HUD expiring use restriction project in 
Boston are in the final stages of negotiating the conversion of this distressed property 
into a rehabilitated development in which the residents have a significant participation 
in ownership and management, and a guarantee of future full ownership. 

Castle Square is a 500 unit Section 221(d)(3) development located on the 
borderline of Boston's South End and Chinatown communities. The residents are low 
and moderate income families of Asian American, African American, Hispanic and 
White descent. It was built over 20 years ago on urban renewal land, many of the 
current residents have lived there since initial occupancy, and the site contains a 400 
car parking garage and an A & P food store, as well as other commercial space. 



CEDAC's 1991 Annual Report 
Page 7 



During the summer of 1987, before the passage of the original federal 
preservation law, the Castle Square Tenant Organization, Inc. (CSTO) became aware 
that the owner, an affiliate of the Druker Company, had executed a Purchase and Sale 
Agreement to sell the property to a limited partnership organized and controlled by 
the Winn Development Company (Winn). The price was to be over $21 million. 
CSTO was concerned that the federally subsidized mortgage might be prepaid and that 
the developer might try to market the units as condominiums, in what was then a 
strong market. 

Because of the large amount of public resources required, and for other 
reasons discussed below, tenant support was necessary as a practical matter for the 
contemplated sale to be feasible. CSTO, which has achieved a strong multicultural, 
multiracial membership representing the diverse composition of the development, met 
with Winn and Druker in the fall of 1987. Winn agreed from the outset that long 
term affordability would be preserved. Winn also agreed to sell to a tenant controlled 
entity in 10 to 15 years and to give CSTO a role in management. Winn indicated that 
it had HUD commitments for 500 units of Section 8 Loan Management financing and 
for $5.5 million in Flexible Subsidy funds. In addition, Winn had obtained 
preliminary commitments for $2 million in state weatherization funds and for $ 2 
million from the City of Boston for improvements to City owned infrastructure in the 
development. The proposal included equity syndication, using Low Income Housing 
Tax Credits, with Winn as the sole general partner. As originally conceived by 
Winn, CSTO had no role in the ownership entity. 

Deborah Backus, co-chair of CSTO believes strongly that "tenants themselves 
should be directly involved in all negotiations affecting their homes and their lives. 
We should call the shots in conversations with HUD, developers, architects, and 
contractors, and we expect our technical assistance people to support us in this 
approach. " To assist in its negotiations with Winn in this spirit, CSTO assembled a 
technical team bringing to the table on its side financial, legal (both advocacy and real 
estate oriented), organizational and architectural skills. CEDAC is providing the 
financial analysis as well as assisting with the intricacies of HUD's preservation 
regulations. Greater Boston Legal Services and Brown, Rudnick, Freed and Gesmer 
are CSTO's legal counsel. The Boston Affordable Housing Coalition is providing 
organizational and strategic planning services, and the architect services were 
provided by Hezekiah Pratt & Associates. 



CEDAC's 1991 Annual Report 
Page 8 



CSTO determined that a number of issues had to be resolved before it would 
agree to support the sale proposal: a clearer definition of the provisions for long term 
affordability; funding for an eventual tenant buy-back of Castle Square from the 
limited partnership which will initially own the project; better specification of the 
tenant management role; an acceptable rehabilitation plan, operating budget and future 
reserves; a source of technical assistance funds; the disposition of the parking garage 
(which, although the seller will retain ownership, was originally dedicated to the 
tenants' use); the continuation of the A & P food store; and the contribution of the 
seller to CSTO's preservation effort. 

The negotiations over these issues continued for two years, during which the 
parameters of the development changed significantly in CSTO's favor. However, an 
impasse was reached over the disposition of the garage (which Druker wanted to 
retain for redevelopment) and over the level of Druker' s financial contribution to 
CSTO's efforts. The Boston Redevelopment Authority was asked by CSTO to 
mediate a resolution, and in May, 1990, a landmark Project Agreement was executed 
among CSTO, Winn and Druker, and the BRA voted the approvals which were 
needed to resolve the zoning and land use issues under its jurisdiction, all conditioned 
on the requirements of the Project Agreement. 

The Project Agreement provides that: CSTO will be a co-general partner 
with Winn in the ownership entity; CSTO will become sole general partner after 5 to 
10 years (with funds provided under the Agreement); CSTO will have the right (and a 
$1.5 million fund) to buy out the limited partners beginning after 12 years; CSTO 
will be involved in increasing management responsibilities, and will receive 
appropriate training; CSTO will receive a $1.2 million Tenant Equity and Repair 
Fund (TERF) from the seller; CSTO's technical assistance expenses will be paid as a 
project expense; enforceable use restrictions for long term affordability beyond the 
federal requirements will be established; the levels of repairs, project security and 
operating budgets are all significantly increased in accordance with CSTO's concerns; 
and CSTO will receive 150 parking spaces in the garage which is being retained by 
the seller, as well as in any redeveloped garage, and will have project review powers 
regarding any such redevelopment. 

The project's financing has been approved by the Massachusetts Housing 
Finance Agency. Although HUD has reduced CSTO's buyout fund from $1.5 Million 
to $880,000, the total funds available to CSTO, over $2 Million, are unprecedented. 
With the exception of a HUD subsidy layering analysis which has not yet been 



CEDAC's 1991 Annual Report 
Page 9 



resolved, all key aspects of the proposal have also been approved by HUD. The 
Castle Square project illustrates how tenants can have a major impact on a proposed 
sale to a third party, especially when the tenants have specific leverage points and are 
able to obtain the necessary technical support. Considering that the project's history 
spans a time interval beginning before the enactment of the first federal preservation 
law (ELIHPA), and continuing after the passage of its replacement, Title VI of the 
Cranston Gonzalez National Affordable Housing Act, it also illustrates how difficult it 
can be to craft a unique development solution in an environment of regulatory 
instability. 



Housing Innovations Fund 

Secretary Mary Padula of the Executive Office of Communities and 
Development spent her first day on the job with other dignitaries hurling bricks at the 
windows of an old school in Pittsfield. The ritual launched the demolition phase of 
rehabilitation for the Redfield School conversion. Berkshire Housing Corporation, a 
regional non-profit housing development organization, is developing the abandoned 
structure into twelve units of housing for parenting teens using subordinated financing 
from the Housing Innovations Program (HIF). 

The project is typical of those EOCD has helped with HIF financing during 
that program's three and a half years of operation. CEDAC has worked closely with 
EOCD in underwriting and servicing HIF loans. The collaboration has produced a 
program unique in its ability to reach smaller projects serving especially needy 
populations. 

■ The typical HIF project contains 25 housing units involving between 
$8,000 and $9,000 per unit of HIF funding. 

■ EOCD has made commitments to finance 120 projects which will 
produce 2,800 housing units; of these, 67 have already closed HIF 
loans producing 1,730 units. 

■ During FY 91-92, CEDAC closed 34 HIF loans creating 904 housing 
units and made funding recommendations to EOCD involving 44 
projects 



CEDAC's 1991 Annual Report 
Page 10 



■ Seventy-seven nonprofit developers have secured HIF funding 
commitments to develop housing in 47 different municipalities across 
the state. 

■ Among the 2,800 HIF-supported housing units completed or in the 
pipeline, 28% is for limited-equity cooperatives, 31% for special 
needs housing, 31% for single room occupancy lodging houses, 
almost 7% for transitional housing, and 3% for emergency shelters 
for the homeless. 

■ For each HIF dollar, borrowers have been able to leverage another 
seven dollars in additional financing. 

DMR Belchertown State School Closedown 

When the Department of Mental Retardation put out a Request for Proposals 
(RFP) for community based housing units in the summer of 1990 they knew they 
needed units quickly. Their job was to provide quality community care housing for 
developmentally disabled individuals who resided at the soon to be closed 
Belchertown school. Thanks to a capable non-profit development team, a simplified 
financing approach using the Housing Innovation fund and a creative leasing 
arrangement with DMR, one year later, 24 consumers moved into permanent, 
handicapped accessible housing in their communities. 

The Housing Allowance Project (HAP), a regional non-profit housing 
organization based in Springfield, responded to the DMR RFP with a straightforward 
financing proposal. They would acquire and build on or rehab six sites using 
conventional financing from a local lender and Housing Innovation Fund financing. 
The simplicity of the financing mechanism was important because the units needed to 
be on line quickly. HAP's proposal was successful and they acquired the sites, 
assembled the financing and built or renovated the units to meet DMR's handicapped 
accessibility requirements in record time. 

The Housing Innovation Fund (HIF), administered and underwritten by 
CEDAC for Executive Office of Communities and Development (EOCD), provided 
the important public equity necessary to make the project bankable. HIF provides 
flexible financing in the form of low interest, deferred payment subordinate loans for 
development of innovative projects such as limited equity cooperatives, single room 



CEDAC's 1991 Annual Report 
Page 11 



occupancy units and special needs and transitional housing. HIF has financed 2792 
units with $22,262,972 in loans and leveraged $ 208,011,000 in specialized housing 
development since its inception 3 years ago. In this case, HIF lent 20% of the 
development costs, enough to encourage a local bank to lend the balance on favorable 
terms, when backed by a 10 year lease commitment by DMR. 

Peter Gagliardi, the executive director of HAP, is pleased with the way the 
program has worked. "The model makes sense and is replicable" says Peter, adding 
that, " Without the Housing Innovation Fund, we wouldn't have been able to meet the 
banks' lending requirements. With HIF, we had a loan commitment in 30 days." 

Another critical element in successfully packaging the Belchertown 
phasedown project was DMR's ability to enter into a long term lease with HAP 
(for 10 years) to assure lenders that the project would have steady cash flow to 
carry the mortgage. DMR has the advantage of knowing that they have secured a 
site for long term quality care and the non-profit developer has an assurance of 
steady cash flow to take to the bank. With the site secure, DMR contracts with a 
provider for service to the consumers. In this model, the non-profit developer 
(HAP) manages the property and assures DMR that it will continue to be 
maintained as a quality site for client care. 

DMR is enthusiastic about the model. Project manager Mary Rogier feels 
that "HAP was able to produce quality sites that fit consumer needs perfectly, 
making it possible for consumers to live in the community where they had 
originally resided or where their families live. We're delighted with the product, 
how quickly it was delivered and especially how well it serves the needs of our 
consumers for community based housing." For DMR the outcome was positive 
not only for the consumers but also produced real savings for the department. 

As part of the state's Facilities Consolidation program, DMR will need to 
move 600 of its special needs clients into community based programs in the next 
18 months. To meet such an ambitious schedule, the department expects to rely on 
models such as the Belchertown phasedown project and on non-profit developers to 
carry it out. Facilities consolidation will also involve the placement of 700 
Department of Mental Health clients. Non-profit developers can expect their 
knowledge of the community and their real estate packaging and financing skills to 
be called upon to help the Commonwealth carry out its special needs housing 
agenda. 



CEDAC's 1991 Annual Report 
Page 12